Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Arroy Snackfoods is considering replacing a five-year old machine that originally cost $75,000. It was being depreciated using straight-line to an expected salvage value of

Arroy Snackfoods is considering replacing a five-year old machine that originally cost $75,000. It was being depreciated using straight-line to an expected salvage value of zero over its original 10-year life and could now be sold for $40,000. The replacement machine would cost $215,000 and have a five-year expected life. It would be depreciated using the straight-line method. The expected salvage value of this machine after 5 years is $30,000. The new machine is expected to operate much more efficiently, saving $6,000 per year in energy costs. In addition, it will eliminate one salaried position saving another $68,000 annually. The firm's marginal tax rate is 25% and the WACC is 9.5%.

Required:

  1. Set up an operating cash flow statement, and calculate the payback, discounted payback, NPV, IRR, and MIRR of the replacement project. Should the project be accepted?
  2. At what discount rate would you be indifferent between keeping the existing equipment and purchasing the new equipment? Use Microsoft Excel and explain it.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Matlab An Introduction with Applications

Authors: Amos Gilat

5th edition

1118629868, 978-1118801802, 1118801806, 978-1118629864

More Books

Students also viewed these Finance questions

Question

Distinguish between operating mergers and financial mergers.

Answered: 1 week ago